— Stock Market
CAPM Calculator
Use CAPM to estimate expected return or cost of equity from the risk-free rate, beta, and market return. See the risk premium, Security Market Line position, and alpha if you add the actual return.
Expected return (cost of equity)
11.4%
- Risk premium (β × ERP)
- 8.4%
- Risk-free rate
- 3%
- Equity risk premium
- 7%
Try: Standard CAPM (β 1.2), Defensive stock (β 0.8), Check alpha (actual 13%), Emerging market + factors
— Security Market Line (expected return by beta)
| Beta | Expected return |
|---|---|
| 0 | 3% |
| 0.5 | 6.5% |
| 1 | 10% |
| 1.2 | 11.4% |
| 1.5 | 13.5% |
| 2 | 17% |
| 2.5 | 20.5% |
— The Security Market Line
Download— How it works
E(R) = Rf + β × (Rm − Rf). The equity risk premium (Rm − Rf) is the slope of the Security Market Line; beta scales it. Alpha = actual return − the CAPM expected return.
The model in one line
CAPM says an asset’s expected return is the risk-free rate plus a premium for the market risk it carries: E(R) = Rf + β × (Rm − Rf). The risk-free rate is what you’d earn with no risk (a government bond); the equity risk premium (Rm − Rf) is the extra the whole market is expected to pay for its risk; and beta scales that premium to this particular asset. A beta of 1 earns the full market premium; a beta of 2 earns twice it (and is twice as volatile); a beta below 1 earns less. The result is widely used as the cost of equity in company valuation.
Worked example — risk-free 3%, beta 1.2, market return 10%: Equity risk premium = 10% − 3% = 7%. Risk premium for this stock = 1.2 × 7% = 8.4%. Expected return = 3% + 8.4% = 11.4%.
Beta, the Security Market Line, and alpha
Plot expected return against beta and you get the Security Market Line — a straight line rising from the risk-free rate, with the equity risk premium as its slope. Every fairly-priced asset should sit on it. That’s where alpha comes in: enter a stock’s actual or historical return and the calculator compares it with the CAPM expectation. A return above the line (positive alpha) means the stock did better than its risk warranted — historically cheap or outperforming; below the line (negative alpha) is the reverse. Alpha is the headline measure of whether an investment earned its keep.
Beyond plain CAPM
CAPM’s single factor — market risk — explains a lot but not everything. The Fama-French model adds a size premium (small caps have tended to out-earn large) and a value premium (cheap “value” stocks over “growth”); enter those to extend the expected return. For investments in emerging or higher-risk markets, a country risk premium is often added on top. All of these are estimates built on historical data and shifting assumptions — beta itself is measured with error and changes over time — so treat the output as a disciplined estimate of required return, not a precise forecast. Not investment advice.
— Reader questions
How do I calculate expected return with CAPM?
Expected return = risk-free rate + beta × (market return − risk-free rate). With a 3% risk-free rate, a beta of 1.2 and a 10% market return, that’s 3% + 1.2 × 7% = 11.4%.
What does beta mean?
Beta measures how much a stock moves relative to the market. A beta of 1 moves with the market, above 1 is more volatile (and earns a higher CAPM return), and below 1 is more defensive. A negative beta moves opposite to the market.
What is the Security Market Line?
A straight line of expected return plotted against beta. It starts at the risk-free rate and rises with a slope equal to the equity risk premium. Fairly-priced assets sit on it; ones above offer more return than their risk implies.
What is alpha in CAPM?
Alpha is the actual return minus the CAPM expected return. Positive alpha means the asset beat what its risk warranted (a sign it was cheap or outperformed); negative alpha means it underperformed for its risk.
What’s the difference between CAPM and Fama-French?
CAPM uses one risk factor (the market). Fama-French adds a size premium and a value premium, which have historically explained returns CAPM misses. Enter those premiums here to see the extended expected return.